Question

If Potential Real GDP is great than Real GDP, we are not in long run macroeconomic equilibrium and we need contractionary policy to achieve it? A.TRUE B.FALSE

Answer 1

If Potential Real GDP is greater than Real GDP, then the economy is not in long-run macroeconomic equilibrium and contractionary policy is needed to achieve it.

Step-by-step explanation:

If Potential Real GDP is greater than Real GDP, then the economy is not in long-run macroeconomic equilibrium. In this case, the economy is producing above its potential level of output, which leads to inflationary pressures. To achieve long-run equilibrium, the appropriate policy is a contractionary policy to reduce aggregate demand and bring it back to the potential level of output. This can be achieved through measures such as reducing government spending, increasing taxes, or implementing contractionary monetary policy.